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electroforecast 2001

Feb. 1, 2003
Companies from all corners of the electrical industry agree. Electrical manufacturers, electrical distributors, independent manufacturers reps, electrical

Companies from all corners of the electrical industry agree. Electrical manufacturers, electrical distributors, independent manufacturers reps, electrical contractors and industry association executives who participated in a survey by the Intertec Electrical Group are concerned that 2001 could be a soft business year. But, overall, respondents were not overly pessimistic.

the economy The Fed's failure to reduce interest rates fast enough to head off trouble, a weakening of consumer confidence and an overreaction to the collapse of many dot-coms are the biggest danger signals that Malcolm O'Hagan, president, National Electrical Manufacturers Association (NEMA), Rosslyn, Va., sees for 2001. He urged his members to keep a close eye on the new administration's tax policy.

Bob Murphy, senior vice president, Hubbell Wiring Systems, Milford, Conn., said high distributor inventories are a concern.

Hank Bergson, president, National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., agreed that businesses are slowing. He added that because prices in many product areas are relatively low right now, "There will be great pressure to increase price, but maintain share."

Barry Landman, owner, Landman Electric Co., an electrical contractor based in Huntsville, Ala., sees a "possible light recession in February and March," but he expects things to turn around by May and believes his company will have a good year, with sales growth between 6 percent and 9 percent. Landman sees business opportunities in three emerging markets - wind energy, fuel cells, and photovoltaics and solar energy systems.

A commercially oriented electrical contractor forecasting double-digit growth this year is also optimistic. "I do not foresee anything that will greatly change or impact our business in the real near future," said Mike Pogreba, president, ABEC Electric Co. Inc., Nashville, Tenn. "The economy will remain strong and new construction will continue to grow."

One Iowa rep thinks rural markets will see a dramatic business increase in 2001, but he believes metropolitan areas could be in for a rough road ahead. "I think the larger cities and the coasts will see a significant slowdown in commercial business, and even more in the industrial markets," said Scott Vande Vegte, president, Russell's Electric, Sioux City, Iowa. "Housing will hold its own."

Curtis Fritz, owner, CL Fritz Electrical Contractor, a residential oriented electrical contractor based in Denver, Pa., expects his company's growth this year to be between 6 percent and 9 percent. While he doesn't see any real danger signals down the road, he believes new construction will have to slow down eventually.

A major concern for the electrical industry is the turn of events with the stock market and the resulting "wealth effect," said Jay Thomas, director of marketing, AFC Cable Systems, New Bedford, Mass. "This has a huge impact on human psychology and filters into personal as well as professional decision making. It's, `Will I invest money in a new project now or wait to see how things turn out?'"

John Alton, president, Minerallac, Chicago, agreed that if people don't feel prosperous, it has a psychological effect and affects their purchasing decisions. "It affects selling tendencies, and when it (the economy) starts to go south, it goes south as a fulfillment of predictions," said Alton.

Another factor that respondents believed would affect the electrical industry is the change in leadership in Washington. Dirk Van Dongen, president, National Association of Wholesaler-Distributors (NAW), Washington, D.C., said NAW is "delighted" with the Republican victory for the presidency.

"NAW endorsed the Bush-Cheney ticket. Their agenda aligns in many key respects with that of the wholesale-distribution industry," said Van Dongen. "Look for action on tort reform, estate taxes, ergonomics and inside-sales reform, which is of special interest to electrical wholesalers."

The increasing number of distributor and manufacturer mergers and acquisitions continues to be a challenge for the industry, said Jim Burton Jr., president, Jim Burton Agency, a rep agency in Charlotte, N.C. "Several companies we represent were involved with mergers/acquisitions," said Burton. "We lost on some but gained on others. All did tend to be hurt by computer problems and integration of personnel, leading to reduced business and lower profits."

the web Survey respondents were also in general agreement that electronic commerce has not yet produced many of the real-world results that even its most devout converts expected.

Maxine Moneada business manager, Frontier Electric, an electrical contracting firm in Alamogorda, N.M., said her company's suppliers have Web sites and ordering, but that she prefers the personal sales rep, "a person we can talk to and hold responsible for their service and products."

Jim Harrod, president, Electrical Controls Inc., Holbrook, Mass., said e-business is "way overblown."

"The hysteria would have you believe that a company is history if it has no current operating transactional site," said Harrod. "Most of our customers - industrial OEMs and end users - believe it's the future, not the present. Few have expanded beyond e-mail. Transferring technical or product documentation is the most-used aspect today."

Harrod urged manufacturers to continue to invest in traditional "bricks and mortar" distributors. "Even in a cyber world, it still comes down to relationships, reputation, competence, price and delivery," he said.

One California electrical distributor was concerned about the cost of implementation of electronic commerce versus the volume of business that it produces. Mike Christenberry, vice president and general manager, B&K Electric Wholesale, City of Industry, Calif., is excited about the potential of e-business and the way it forces electrical companies to improve their information systems. But he said his customers were skeptical about electronic commerce. "There are too many variables to purchasing online, especially in a construction market."

Several of the survey respondents were frustrated with what they saw as uneven adoption rates of business practices related to electronic commerce. Said Daryl Cook, owner of G-T Sales, a Salt Lake City-based rep agency, "It becomes cumbersome if everyone you do business with is at a different level. As a rep, you would like to see distributors and end users access manufacturer Web sites for information. We still get 100% of the calls. One problem is that most of our factory Web sites take too long to navigate through. It's no wonder they call us first."

Contractor ABEC Electric's Pogreba is more concerned with the service that he gets from electrical distributors than with the tools that they need to provide this service.

"No matter what happens with technology, we still rely on service and competitive prices," said Pogreba. "We delegate a responsibility to suppliers and trust they will get the right material on site at the right time for the right price. How they accomplish this is up to them."

However, few respondents doubted that electronic commerce has already started reshaping the electrical market. AFC Cable Systems' Jay Thomas said people have "overestimated the speed with which e-business will bring change to the electrical construction market but underestimated the impact that it will have.

"Because of all the initial hype, many are skeptical. Time will change that as technology and e-commerce continue to change our business."

Other manufacturers said e-business would fundamentally change the supply chain and bring them much closer to end users. "It will enhance our relationships with our ultimate user/customer," said a senior executive with one large manufacturer. "Our customers are both excited and disappointed. There is so much that could be done with e-commerce and it has not yet materialized."

"The Internet will shrink our industry supply chain," said another vendor. "It will bring manufacturers closer to the ultimate customer. Those manufacturers who use reps will see them lose importance."

Steve DeBoer, I-Pro, commercial sales manager, a rep in Denver, Colo., said his company had a significant in-house high-tech investment, but that his company is still cautious in its investments. "We are still waiting to see a success and determine who will be left after this initial phase as regard to dot-coms.

"Customers are skeptical but interested. They are focused on waiting on the acquisition and order-entry phase instead of taking immediate advantage of segments that work well and offer advantage now, such as e-mail, catalogs and cut sheet access on the Web."

new markets While much of the excitement over the promise of the Web appears to have died down for the time being, some respondents were excited about new business opportunities in several market segments, including home networking, cellular tower construction and telecom hotels.

Tim Plumb, owner, Peak to Peak Electric, a small electrical contractor based in Rollinsville, Colo., is expecting double-digit sales growth and is sold on home networking.

"Every house I have done in the last six months has had a network system installed, and more home builders are asking instead of me telling them about it."

Scott Vande Vegte of Russell's Electric, said datacom has provided "a fair amount of growth." He recently got into the home automation business through the start-up of a new company, Hills Home Systems.

A Massachusetts rep said the need for additional power generation in his market will offer additional opportunities for reps, distributors and electrical contractors in the construction of co-generation facilities, and in the sale of transformers.

Backup power in the 1,000A to 5,000A range for Internet companies was also a big market for Charley Cohon, president, Prime Devices Corp., a rep based in Morton Grove, Ill. However, he said problems with dot-coms may dampen the market for Internet infrastructure, which could reduce the demand for on-site power.

workplace woes Respondents said the growing problem of finding and keeping good employees was a major concern. Said Frontier Electric's Maxine Moneada, "We have a need for licensed professionals and not enough to man all of the expected growth. We can't keep good help at regular wages. Everyone moves from job to job looking for Davis-Bacon wage rates."

A St. Louis rep had similar concerns: "Trained personnel will go where the money is. Reps commissions are being cut and yet require a greater capital investment. Reps cannot compete for qualified people who are willing to work and travel as required."

distributor relations Reps and electrical contractors had a lot to say about how electrical distributors can improve their relationships with their business partners. One Massachusetts rep said electrical distributors should, "Use us as a resource to secure incremental, profitable orders. Let's team up on specific projects, customers and products. Let's go to the customer early to establish spec preference and our capacity to add value to the customer's effectiveness."

Jerry Haines, chairman, Haines Sales Corp., East Syracuse, N.Y., said that while everyone talks about the need for reps to provide better service, few understand the price that goes along with it.

"Understand that as you expect better service, neither the distributor nor the manufacturer pay us for it," said Haines. "In fact, they cut commissions. Also, the paperwork for buying groups and programs costs us a lot of time and money."

Jim McDonough, president, McDonough & Associates, Canton, Mich., had very specific advice to electrical distributors: "Raise margins ... Hire and maintain good skilled personnel ... Start selling and don't be order takers."

Many contractors' concerns regarding their business relationships with electrical distributors centered on the distributors' need to improve customer service, specifically at the counter. Electrical contractors urged electrical distributors to do a better job of training their counter salespeople, but lamented that they were having trouble keeping quality employees, too.

Curtis Fritz of CL Fritz Electrical Contractor said electrical distributors could improve their relations with electrical distributors by opening earlier or closing later, making online purchasing available, keeping a good inventory, having good help and providing reliable shipments.

An Alabama electrical contractor was also looking for electrical distributors to improve some of their basic services. "We need product available, we need competitive pricing. We need good service, maybe more deliveries to job sites. On counters, we need people to know their products," said Landman Electric Co.'s Barry Landman.

Ralph Rundell, owner, Rundell Electric, Grygla, Minn., doesn't like to shop around at several different distributors to get a competitive price. He also didn't want to be "penalized" for being a small contractor. "Having three, four or five wholesale prices stinks," he said.

A Wyoming electrical contractor also was looking for electrical distributors to focus more on the basics. "Stay with the personal contact, add personnel in sales and the warehouse and respect the time lines of your customers."

Even with the U.S. economy slowing in 2000, electrical distributors were experiencing stronger business than in the year before. With those mixed signals in mind in the fall of 2000, they gave their forecasts for 2001 with tempered optimism. They expect slower growth for 2001 after a strong finish to 2000.

Specifically, electrical distributors forecast that 2001 sales will finish a very healthy 7.1 percent ahead of 2000 after setting a 10.5-percent pace in 2000.

Both percentages represent strong growth for the electrical wholesaling industry. Over the last 10 years, its annual sales growth has averaged 6.6 percent.

Over those ten years, however, the industry has benefited from one of the longest peacetime economic expansions in the history of the United States; and many electrical distributors today may well have forgotten (or never experienced) the recessions of the 1970's and 1980's.

Some economic theorists today argue that the United States has forged a new economic growth model, one that minimizes or even eliminates recession; that outcome remains to be seen. At the close of 2000, U.S. economic growth had decidedly slowed in response to higher interest rates, a volatile stock market and rising oil prices, but the pace of growth was still healthy. Continued growth at a slower pace seems in the cards for the economy as a whole in 2001. In past decades, electrical distributors' business has tended to trail the economy by about six months going into downturns as well as upswings. With that in mind, it would seem likely that electrical distributors as a whole have a chance of hitting their predicted mark for 2001.

Expectations among distributors for 2001 vary by region of the country; in every region, though, distributors foresee slower growth in 2001 than in 2000. In all regions, growth for 2001 is forecast in single digits, in comparison to some double-digit performance in 2000. In both years, the multi-region companies (the big chain distributors and some specialists that sell nationwide) anticipate slightly higher rates of sales growth than other respondents, and their estimates pump up the national percentage forecasts.

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